The Trend in Microsoft Stock is a Proxy for the Entire Market…

MSFT Stock: a Bellwether Stock

It may be hard to believe, but I view Microsoft Corporation (NASDAQ:MSFT) stock as a bellwether gauge, and a measure of the overall health of the tech-heavy NASDAQ index.

My view has nothing to do with the company’s foray into cloud computing and skewing its business model away from the “Windows” platform and the personal computer (PC). I base my view on simply looking at and analyzing the MSFT stock chart. It is indeed a picture of beauty, and it continues to suggest that higher prices are in the cards, and that an equity bull market is still intact.

Using stock charts as a primary form of investment analysis is known as technical analysis. This body of knowledge is based on the notion that there are embedded trends in stocks and, as a result, historical price and volume data can be used to discern the trends and forecast future prices. I have been studying and refining my skills in this method for nearly two decades, and I have have achieved great success by applying it to my trading strategies.

The pedestal I place Microsoft stock on, as a bellwether stock, is based on its adherence to simple technical rules and its constructive price action. The following MSFT stock chart illustrates these factors.

Chart courtesy of StockCharts.com

The title of bellwether stock was attained because a bullish trend that is made up of higher highs and higher lows—which is the quintessential definition of a bullish trend—is easily identified by using a simple uptrend line. This simple uptrend line is created by connecting the troughs on the price chart above, and it serves to define the entire bullish run to the upside that began in 2009, after the financial crisis concluded.

This uptrend line has been in development for eight years, and it has been tested on numerous occasions. Every time, buyers have stepped in at this level to create the necessary support to keep it intact. This uptrend line is so pristine that it is difficult to refute its importance. It has become the dividing line between a bullish and bearish market and, as long as Microsoft stock is trading above it, higher prices are expected, and the general health of the market remains in check.

If MSFT stock ever did manage to trade below this trend line, it would serve to suggest that the bull market that began in 2009 had concluded, that and a larger correction was set to ensue. Due to the nature of their business dealings, I would have to believe that a general bear market in technology stock was also set to ensue.

The price action above the uptrend line has been extremely constructive. Constructive price action consists of impulse waves that serve to advance the price, and consolidation waves that serve to unwind overbought conditions and set up the next advancing impulse wave. This alternating wave structure, which is consistent with constructive price action, contains the necessary building blocks to create a trend that is sustainable.

The constructive price action is suggesting that the current bullish trend is still healthy and that higher prices are probable.

The following Microsoft stock chart illustrates bullish price action on a smaller scale.

Chart courtesy of StockCharts.com

In late June 2016, a death cross was generated. A death cross is a bearish indicator that is generated when the faster moving average (50-day moving average) crosses below the slower moving average (200-day moving average). This indicator is used to confirm that a bear market is in development. A month later, in July, this indicator was averted and a golden cross was generated in its place. A golden cross is a bullish indicator, and is the exact opposite of a death cross.

It takes a lot of buying pressure to avert a bearish indicator, and the inability for the death cross to remain engaged is an indication of the inherent strength and bullish momentum that is contained within Microsoft shares. I have come across many averted indicators in my time, and I have found them to be very powerful indications. It is not uncommon for a price to accelerate in the predominant trend after an averted signal is generated, and the bullish run off the July lows from $47.13 to the current price of $65.00 is a testament to that.

This bullish run off of the July lows has been supported by a similar uptrend line, only on a smaller scale. This bullish trend within an overall bullish trend serves to reinforce the notion that the trend toward higher prices is set to continue. If this premise is true, then the tech-heavy NASDAQ index is also set to continue its advance.

Bottom Line on Microsoft

I am bullish Microsoft stock because the indication on the stock chart continue to suggest that such a view is warranted and, as long as MSFT stock continues to trade above a long-term bullish uptrend line, I will have all the reason I need to believe that the bull market in technology stocks is still in play.